Taxation

6 Months Ended

Jun. 30, 2011

Taxation [Abstract]

TAXATION

13.   TAXATION

Income tax expense for the three and six months ended June 30, 2011 was $1.0 million and $1.6 million, respectively, as compared to $16.1 million and $22.0 million, respectively, for the three and six months ended June 30, 2010.

Under current Bermuda law, the Company and its Bermuda subsidiaries are not required to pay any taxes in Bermuda on their income or capital gains. On March 25, 2011, the Company received confirmation from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, the period for which the Company and its Bermuda subsidiaries will be exempt from taxation in Bermuda would be extended until March 2035.

The Company has operating subsidiaries and branch operations in the United Kingdom, Australia, the United States and Europe and is subject to federal, foreign, state and local taxes in those jurisdictions. In addition, certain distributions from some foreign sources may be subject to withholding taxes.

The expected income tax provision for the foreign operations computed on pre-tax income at the weighted average tax rate has been calculated as the sum of the pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate.

The actual income tax rate for the three and six months ended June 30, 2011 and 2010 differed from the amount computed by applying the effective rate of 0% under Bermuda law to earnings before income taxes as shown in the following reconciliation:

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2011			2010			2011			2010
Earnings before income tax	$	10,350		$	28,545		$	14,470		$	50,388
Expected tax rate		0.0	%		0.0	%		0.0	%		0.0	%
Foreign taxes at local expected rates		70.9	%		52.2	%		65.2	%		53.1	%
Benefit of loss carryovers		0.0	%		(1.5	)%		0.0	%		(6.0	)%
Change in uncertain tax positions		0.5	%		0.2	%		0.7	%		0.3	%
Change in valuation allowance		(63.5	)%		4.2	%		(49.0	)%		(4.1	)%
Impact of Australian tax consolidation		0.0	%		0.0	%		(6.2	)%		0.0	%
Other		1.5	%		1.3	%		0.3	%		0.4	%
Effective tax rate		9.4	%		56.4	%		11.0	%		43.7	%

The Company had net deferred tax assets of approximately $14.9 million and $3.2 million as of June 30, 2011 and December 31, 2010, respectively. Deferred income taxes arise from the recognition of temporary differences between income determined for financial reporting purposes and income tax purposes. The temporary differences that give rise to significant portions of the deferred tax assets and liabilities are net operating loss carryforwards, claims reserves due principally to the discounting for tax, and investments.

The Company has estimated future taxable income of its foreign subsidiaries and has provided a valuation allowance in respect of those loss carryforwards where it does not expect to realize a benefit. The Company has considered all available evidence using a “more likely than not” standard in determining the amount of the valuation allowance.

As of June 30, 2011 and December 31, 2010, the Company had unrecognized tax benefits of $5.7 million and $5.6 million, respectively, relating to uncertain tax positions.

The Company’s operating subsidiaries in specific countries may be subject to audit by various tax authorities and may have different statutes of limitations expiration dates. With limited exceptions, the Company’s major subsidiaries that operate in the United States, United Kingdom and Australia are no longer subject to tax examinations for years before 2005, 2008 and 2005, respectively.

Because the Company operates in many jurisdictions, its net earnings are subject to risk due to changing tax laws and tax rates around the world. The current, rapidly changing economic environment may increase the likelihood of substantial changes to tax laws in the jurisdictions in which it operates. The Company cannot predict what, if any, legislation will actually be proposed or enacted, or what the effect of any such legislation might be on the Company’s financial condition and results of operations.